Monday, April 29, 2013

This Dove "Real Beauty" online ad has created quite a stir. You can read about the response to this campaign here. Dove certainly seems to have struck a chord with its customers. The fact that some people have criticized the ad doesn't seem to concerning, as most Dove customers seem to be responding positively. The attention that it has received seems to endorse the view: there is no such thing as bad publicity. Nevertheless, there's a big question remaining: Will this attention turn into additional revenue for Dove? Can the engagement with customers translate into sales in the supermarket?

Friday, April 26, 2013

Maureen F. McNichols of Stanford Business School and several co-authors have conducted a fascinating study regarding corporate bankruptcies. They have examined the usefulness of financial statement analysis as a tool for predicting bankruptcy. They analyzed data from 1962-2002 for thousands of publicly traded companies. They found that, over time, financial statement analysis (traditional ratio analysis and the like) became less useful as a means of predicting corporate bankruptcies. Note that the analysis was still quite useful, just not as effective at predicting bankruptcy as it was back in the early to mid-1960s. Why might that be the case? The scholars offer several suggestions. First, companies restate earnings more frequently today than they did in the 1960s. That would suggest a higher frequency of earnings manipulation of earnings today. Second, many tech companies spend a significant portion of sales on research and development. Those investments do not make it onto the balance sheet in the way that capital investments in property, plant, and equipment do. As a result, ratios become less useful in predicting bankruptcy. Finally, more firms have negative income today than in the early 1960s. When firms lose money in a particular year, it becomes much harder to predict what will happen to them in the following years. Yet, losses in a particular year don't necessarily mean a bankruptcy is in the future.

Thursday, April 25, 2013

Regular readers of the blog know that I have commented several times on the fascinating competition that has unfolded in sports talk radio in Boston. For many years, WEEI had a dominant position in the Boston market. Entrants came and went, unable to topple the station or even to survive in the market. Then, the Sports Hub (98.5) came along and knocked off the powerful incumbent. It took a substantial ratings lead in many key time slots. In the past, I've commented on how 98.5 did things a bit differently, while also focusing on a few important customer segments, so as to be successful.

I've noticed one other lesson from this interesting competition. In the mornings, the Toucher and Rich show on 98.5 has overtaken the once-popular Dennis and Callahan show on WEEI. They became successful for many reasons. However, one key thing that they have done is bring on guests in a different manner. On the WEEI show, most of their prominent guests come on the show between 8am and 10am. On the Toucher and Rich show, many key guests actually come on the show prior to 8am. Why is this important? Well, I've noticed that I miss many of the WEEI guests as I'm at work by 8:00am or shortly thereafter. Why does WEEI have its guests on after many audience members are already at work? I think, in part, it's because the guests prefer the later interviews. They don't want to get up that early, or they aren't yet prepared to be interviewed on radio at that early hour. WEEI is serving the needs of its guests, but at the expense of its audience members! The audience wants those early interviews. The Sports Hub has delivered on that previously unmet customer need.

What's the lesson for other businesses? Think about whose needs you are actually fulfilling. Yes, you have multiple constituents. However, at the end of the day, the customer's needs must come first. You never want to leave their needs and desires unmet because you are focused on other priorities.

I use one dinner a year with my board to bring in
young, high-potential managers. We have everybody give an “elevator
speech.” You have three minutes to tell the board and other people in
the room where you came from, the challenges you’re facing and how
you’re trying to create value for the company. Everybody might want to
take 15 minutes, but you have to be succinct. This is part of what we’re looking for in people who have potential;
it’s all about communication. What are the challenges you have, and you
have three minutes to explain them, because there are 40 of you and
we’re going to be here all night otherwise. And if you take somebody
else’s time, that’s not respectful. It’s all about being succinct and
articulate.

Why do I like this technique? First, it provides the board an opportunity to interact with people who may become senior leaders in the organization in the future. They can begin to develop a relationship with these individuals. Second, it challenges these young leaders' communication capabilities. Can they be succinct, interesting, and engaging? Can they create a powerful conversation based on their three minutes of remarks? Third, it fosters the establishment potentially of some key mentoring relationships. Not only may the young leaders gather advice and counsel from board members, but the board members may learn a great deal by hearing from young people who come from a different generation and may be more similar to the firm's actual core consumers. Fourth, the invitation to present, in and of itself, offers a wonderful reward and recognition for these high performers. Yes, they would love to be paid well. However, these folks also care about their future career path. Having this opportunity certainly will be welcomed and may help retain top young talent. Finally, the board hears from voices other than senior managers about what is going on at the company. That can be important. Senior managers naturally filter information as they present updates to the board. Senior executivespresent information through their lens and perspective. Having a different voice and perspective talk to the board can be helpful.

Tuesday, April 23, 2013

How do we motivate ourselves to achieve our important, but not necessarily highly urgent, goals and objectives? Writer Laura Vanderkam has a neat article at Fortune.com about how to use personal accountability systems to keep us on track when it might otherwise be easy to procrastinate. Vanderkam explains:"So what do successful people do? They create external motivations for
things they want to do but that life has a way of crowding out. They
create accountability systems that boost important but not urgent items
to the top of their priority lists -- ideally in a way that makes
failure really uncomfortable. Effective people know that we succeed when
success seems like the easiest choice."

Vanderkam actually tried this technique herself while working on her novel. She tapped someone as her "writing buddy." She set out to write 2,000 words per week, and Vanderkam checked in with her writing buddy each Friday to see how things were going. Soon enough, she was writing more than 2,000 words per week, and then she actually finished her rough draft. The buddy system worked.

Why does this type of personal accountability system work? Vanderkam argues that we don't like to appear lazy before others. Therefore, we are motivated to reach the goals that we have set out, and that we know our partner(s) will hold us accountable for achieving.

Monday, April 22, 2013

Social psychologist and best-selling author Heidi Grant Halvorson has published a new book titled, "Focus: Use Different Ways of Seeing The World for Success and Influence. Halvorson explains the difference between promotion-focused individuals and prevention-focused individuals. People with a promotion focus tend to perceive goals as opportunities to gain something. People with a prevention focus tend to think about goals in terms of what they might lose if they don't achieve their objectives. Promotion-focused individuals have high aspirations and are willing to take risks to achieve grand objectives. Prevention-focused individuals tend to try to avoid mistakes and losses. They are more risk averse. They are more focused on their duties and obligations; they strive to be the steady, stabilizing hand as opposed to the adventurer charting new territory.

Halvorson does not advocate one focus over another. Instead, she emphasizes the need for people to understand the perspective of those with whom they are working and collaborating. Recognizing that you may have a different focus than your partner or team member can be the first step toward more effective collaboration. Actually understanding and appreciating their different perspective helps even more! For more on this topic, check out this brief article in the Wall Street Journal about Halvorson's work.

Thursday, April 18, 2013

Yael Hochberg,
Michael J. Mazzeo and
Ryan McDevitt have conducted some interesting new research on competition and cooperation in the venture capital market. They found that competition has a different impact in the VC market as compared to most other industries. Mazzeo explains in a write-up on the Kellogg Insight website:

"In other industries what you see is that the first
competitor that is similar to you to enter the market hurts you a lot,
and the second competitor hurts you a little less, and the third even
less. But that flips around in the venture capital
industry, where the first competitor that is similar to you to enter the
market doesn't hurt you very much, but the second competitor hurts you a
little more and the third hurts you even more. This makes sense because there is a
beneficial element to the first competitor in the market if you are
working together and sharing resources. But that benefit begins to go
away with the second competitor, and it's even less with the third."

Cooperation is key in the VC market because some firms may be very adept at providng the expertise required to help a particular start-up grow, but may want to spread the risk by bringing in a partner to provide some of the needed capital. In certain cases, a start-up may need different types of expertise, access to networks, etc. One VC firm may provide some of that assistance, while another VC firm may provide other forms of support and guidance. Once firms work together on one deal, they may learn that they can work together effectively, and that each has important capabilities to contribute. That makes them likely to want work together again. Thus, cooperation becomes crucial to success in the VC market.

On the other hand, VC firms still compete to find the best deals, get the most favorable terms, identify the next hidden gem so that they can get in early, etc. What that means is that a feeding frenzy can eventually take place, where too much money is chasing too few deals... as a result, diminishing returns eventually can kick in, and returns on investment can fall. Cooperation doesn't mean that rivalry won't harm returns. That still happens, as it would in any industry.

In a webcast McDonald's executives held with franchise owners last
month, the company said 1 in 5 customer complaints are related to
friendliness issues "and it's increasing," according to a slide from the
presentation reviewed by The Wall Street Journal. The webcast
identified the top complaint as "rude or unprofessional employees." One slide said that complaints
about speed of service "have increased significantly over the past six
months." Another mentioned that customers find service "chaotic." "Service is broken," said a
slide from part of the webcast delivered by Steve Levigne, vice
president of business research for McDonald's USA.

What could be causing the problems at McDonald's? I have several theories. First, the company has experienced many consecutive years of same-store sales growth. The firm prospered during the struggling economy, as folks looked for value. Moreover, McDonald's foray into coffee drinks turned into a blockbuster success. One wonders if the growth simply began to tax many of its smaller restaurants. Did crowds overwhelm the firm's processes and systems? Second, McDonald's did expand its menu to offer more drinks as well as healthier food options. Did the new options add so much complexity that they slowed down service considerably, or made it difficult for employees to provide food in an efficient manner? In short, I wonder if success brought these problems upon McDonald's. Perhaps there is a lesson there for every rapidly growing quick-service or fast-food restaurant chain. Growth may be wonderful, but service deteriorates, you may have a major problem on your hands.

Sunday, April 14, 2013

Business Week has an interesting article about the recent decision by Starbucks to cut prices on its coffee sold in grocery stores by $1 per bag. According to the article, "Last quarter the company collected about $380 million from sales outside its cafés
at an operating margin of 25.5 percent. At that level, the coffee
empire is making a profit of about $2.55 per bag. Take away $1 per, and
Starbucks would have to sell 65 percent more bags to book the same
amount of profit."

Wow... could Starbucks really generate that many more sales to make up for the lost margin? Unlikely. The article tries to offer another explanation, citing Columbia Professor Rita McGrath. Here's an excerpt:

It’s not clear Starbucks will sway that many customers quickly. But the
company could be betting on widening income inequality—what academics
call “the hourglass economy.” The theory is: Major retail growth has
been—and will continue to be—at the low and the high ends of the
socioeconomic scale. Starbucks already has plenty of $6 barista-brewed
drinks to capture the top of that market, but a bag of $10 coffee is
very much in the middle, according to Rita McGrath, a professor at
Columbia Business School.

I respect McGrath's work a great deal. She's a terrific strategy scholar. However, I don't understand this point. How is cutting the price of a bag from $10 to $9 enabling Starbucks to tackle the "low end of the market"? That's some view of the low end! The article continues by citing the fact that lower-end rivals such as Maxwell House, Folgers, and Dunkin' Donuts have cut prices this year as costs of coffee beans have fallen significantly. Here's another excerpt:

And here’s where a little game theory comes into play...By
committing to lower prices (and not using coupons or sales), Starbucks
is sending a signal, McGrath says. It’s serious about the low end of the
market; Dunkin’ Donuts, Folgers, and other competitors can either trim
their margins further or give up volume. Either way, they lose. So
does Starbucks, at least in the near term. But with savvy hedging and
customers lining up for expensive lattes—including increasing crowds in
China—it can stand the pain for a while. And it is betting it is more
efficient than its competitors. As McGrath says: “If you can run
economically enough to make money at the lower price, you’re simply
taking money out of your competitors’ pockets.”

Again, I'm not sure that I understand or agree completely. If Starbucks was clearly the low-cost competitor, I might understand this explanation. It would be using its scale economies and cost efficiencies to attack its higher cost rivals. However, do we really believe Starbucks is the low-cost player in this market? That seems unlikely. Perhaps another explanation is that, after Dunkin' and others cut prices this year, the gap between Starbucks and its lower-priced rivals became too large. Starbucks' differentiated, high quality product could justify higher prices, but not that much higher. The gap in price had simply exceeded the difference in perceived value (or willingness-to-pay) between Starbucks and other coffee rivals in the grocery aisle. If it didn't address that issue, it would have ceded a great deal of volume to competitors. Differentiated players always have to be careful that their price premium doesn't grow too high, exceeding the excess value that customers perceive in their product vs. rivals' products.

If Starbucks, on the other hand, is truly just going for share at the low-end of the market, then I don't understand the logic of the strategy. Why would a differentiated player cut its margins and try to compete directly with low-cost players? Why compromise its premium positioning? I don't think Starbucks is doing that... I don't see them getting into a price war in the grocery aisle just to inflict pain on their rivals. The coffee industry is an attractive one, particularly at the higher end of the market. Why would a market leader spoil that market by triggering an unnecessary price war? That would be bad strategy.

Wednesday, April 10, 2013

The Wall Street Journal reports today on Disney's development of a new type of princess for young girls. Sofia the First is one of the new additions to Disney's family of characters. She's "confident, resourceful and focused on being a good person. She should
not be valued most of all for her beauty. Her royal family should
include exactly zero evil stepmothers." Nancy Kanter, a senior executive at Disney, explains: "We knew we didn't want it to be a young woman looking for a man." The Sophia the First series debuted on Disney Junior on January 11th. It has become the year's top-rated show among pre-school children. Disney aimed to create a princess that would appeal to young girls, but that would provide an image and identity more acceptable to parents than some of the company's traditional princesses. It appears that they have succeeded.

To me, this case provides another interesting development at Disney, besides the unique way that they are trying to reposition a key type of character. Here we have a case of a key new animated character debuting on Disney's cable networks, rather than in an animated feature film. The firm has begun to leverage the character in the theme parks and through its consumer products and retail divisions. Historically, Disney launched key characters through animated feature films, and then leveraged them to other areas. With Johnny Depp's Pirates of the Caribbean movies, we saw Disney take a theme park ride and build a popular series of feature films. Now we have a character debuting on cable and then moving to the theme parks. Could an animated feature film be next for Sophia the First? Disney's ability to find different ways to originate content may be a key driver of growth for the future. Relying only on feature films to launch a new franchise can be expensive and risky. Having other ways of originating and leveraging characters could be key to the company's future... as important as some of the recent acquisitions have been in terms of adding to the stable of characters in the Disney family.

Tuesday, April 09, 2013

For years, scholars and consultants have argued that companies should stick to brand extensions that fit closely with the core brand image and identity. The logic goes as follows: It's ok for Coke to make Diet Coke, but it does not make sense for the firm to offer Coke-branded laundry detergent.

The scholars conducted an experiment, and in that study, they found that visual cues make a difference with consumers. Seeing the physical product, as opposed to just hearing about it, can cause customers to genuinely consider a brand extension that appears to be low fit. According to Kelly Goldsmith, “When you give people pictures, preferences shift because [people] are
focused on quality—they are more interested in quality than fit. Whereas when you show the brand concept without
pictures … the reaction is more focused on fit than quality. Allowing
product comparisons leads to the same results.”

Goldsmith explains the practical implications of the study: “If you get your brand-extension concept
out of the lab and into the store, all of those [benefits from visual
cues and brand comparison] are taken care of. If you are a brand like Nike or Häagen-Dazs, or one of these very
large national brands associated with quality, and you want to make
money by extending that very successful brand even further—to new [but]
lower-fitting categories—what our research shows is that you really need
to show people what that product looks like and show it to them in the
context of other brands in that category."

I find the research very interesting. I still believe firms need to be very attentive to fit when it comes to brand extensions. However, the notion of offering visual cues, sampling, and physical displays does seem to make sense. Those tactics certainly do help a consumer understand and appreciate a new product offering that may not seem to fit with a brand's prior identity.

Thursday, April 04, 2013

The Wall Street Journal reports today about how innovation is actually hurting laundry detergent sales. Well, that's not quite what is happening. Let's explore. P&G launched "pods" last year. The product offered just the right amount of detergent for a load of laundry. The product has been popular with customers. However, it appears that industry revenues are falling. Has innovation been a bad thing? I don't think so. While revenues may be declining, margins for P&G are rising. Their margins for pods are better than for jugs of laundry detergent. Customers clearly like the pods. Moreover, P&G seems to be gaining an upper hand on rivals, who are busy trying to copy them.

The bigger issue here is the obsession with revenues. In the end, industry executives should be focused on profits rather than the top line. Moreover, if customers prefer pods, then executives should be focused on delivering what customers want, rather than blaming P&G for "hurting" industry revenues.

One final thing... If P&G were escalating price rivalry in the industry, that could be problematic. They would be damaging industry structure, making it less attractive. However, that is not what they are doing. They are actually bringing a differentiated product to a market which had experienced a great deal of price competition. That's enhancing industry attractiveness. Other firms should be seeking similar ways to innovate so that they are not just competing on price.

Wednesday, April 03, 2013

Forbes reported this week on a startling new study by Leadership IQ, a company that does a great deal of work on the assessment of employee engagement. The firm examined data from 207 companies on employee performance as well as employee engagement. According to Forbes,

"In 42% of the companies, the employees who do the worst job are the ones
who feel the most “engaged.” At the same time, the middle and high
performers in those firms feel disconnected from their jobs and not very
motivated to come to work every day."

\The article, by Susan Adams, does a very nice job of explaining many of the reasons for this result. Adams, drawing on a conversation with Mark Murphy (Leadership IQ CEO), argues that the lack of a true meritocracy causes disengagement among high performers. Company leaders aren't having the difficult conversations with low performers, and they are not properly recognizing the best employees. I cannot argue with that finding; it seems quite reasonable.I would argue, however, that one other cause may exist for this alarming finding. Many companies simply are not investing effectively in leadership development for their top performers. Notice that I did NOT say that they are not investing ENOUGH. Many companies are spending a great deal of money on leadership development programs and processes. However, many organizations are not spending that money WISELY. We see a litany of problems in many companies: Too many one-off events exist. Too many programs lack cohesion. Too many leadership development events lack clear criteria for determining who should be involved or invited. Far too little follow-up exists after programs are delivered. Until firms start designing more effective leadership development activities, and begin spending their resources more effectively, we won't see engagement rise significantly for the highest performers.

Tuesday, April 02, 2013

Microsoft Research's Kate Crawford has a terrific blog for HBR about big data. In the post, she discusses the hype regarding big data, and she talks about the hidden biases that we must be aware of when analyzing large data sets:

Data and data sets are not objective; they are creations of human
design. We give numbers their voice, draw inferences from them, and
define their meaning through our interpretations. Hidden biases in both
the collection and analysis stages present considerable risks, and are
as important to the big-data equation as the numbers themselves.

Crawford has some terrific examples of biases in data sets. For instance, she talks about how the Twitter data after Hurricane Sandy offers a distorted view of the storm. Why? As the storm progressed, people in the hardest hit areas ran out of battery power on their cellphones. Thus, they stopped tweeting. Folks in Manhattan, where the storm was significant, but not as devastating, engaged in much more Twitter activity. Moreover, people in the lowest income groups are not as well represented on Twitter, because many do not own smartphones. As she writes, "We can think of this as a "signal problem": Data are assumed to
accurately reflect the social world, but there are significant gaps,
with little or no signal coming from particular communities."

The lesson is clear. Begin your big data project by asking: How was the data collected? What populations are overrepresented? What populations are underrepresented? Beyond that, you should ask: Who collected and assembled the data set? Do they have an agenda? Are they biased in any way? Often, the biggest bias in big data has nothing to do with access to technology or underrepresented populations. Instead, the most significant bias lies inside the mind of the person assembling the data. Their agenda clouds the process of data collection.

Monday, April 01, 2013

The Wall Street Journal reports on an interesting new leadership phenomenon. According to this article by Rachel Silverman, "Some self-aware managers are trying out “mistake diaries” or “failure
reports” to help minimize the chances that a problem happens twice –
and to help foster an environment where it’s OK to try and fail."

Silverman describes the efforts of Meebo co-founder Elaine Wherry, who has kept a mistake diary for a number of years. Silverman writes that, "Using a series of sketchbooks, she started taking notes and making
drawings to record her mistakes – such as time-management problems and
hyper-perfectionism — as a personal way to remember them." Wherry has even shared her "most common blunders" with her staff, since she noticed many young new employees making many of the mistakes that she had made earlier in her career. (Take a look at a video created by Elaine Wherry by clicking here).

Everyone should note the importance of reflection as a tool for improving as a leader. We can't just focus on what's next, on the newest pressing problem. We have to find a way to carve out some time for reflection if we are to improve and develop. Of course, finding that time can be difficult in hectic schedules that many leaders keep. So, before thinking about crafting a mistake diary, you have to take a hard look at your schedule. Blocking out some time for reflection is hard, but necessary, if we are to identify and learn from our mistakes.

Michael Roberto

The Great Courses

About Me

I am the Trustee Professor of Management at Bryant University in Smithfield, RI. I joined the faculty after serving for six years on the faculty at Harvard Business School.

My research, teaching, and consulting focuses on leadership, with a particular emphasis on decision-making and teams. I have published two books based upon my research: Why Great Leaders Don't Take Yes For An Answer (2nd edition to be released in May 2013), and Know What You Don't Know (2009).